Financial consultants and tax experts go over the budget with a fine-tooth comb and present their analysis with more focus on investment opportunities and tax benefits.
The Union Budget 2015-16 has been presented without any increase in tax slabs against much-awaited expectations of individual taxpayers. However, there is good news, point out financial and tax experts. For instance, wealth tax – levied on the net wealth exceeding Rs 30 lakh on the last day of a financial year – has been abolished after March 31, 2015. However, an additional surcharge of 2% has been imposed if the total income is more than Rs 1 crore.
Similarly, experts observe that looking at the progressive revenue-generating budget statement one can expect the economy to improve going further, which is a positive sign for equity investments.
Recurring Deposits (RDs): Until now, there was no tax deductable at source (TDS) from the interest paid on Recurring Deposits (RDs). However, there will be TDS on interest paid on RDs, if the amount exceeds Rs 10,000 in a year.
“Earlier, many investors were not reporting their interest income from RDs. Now with TDS, this loophole is plugged. Even though the TDS is at 10%, the investor should pay the balance tax, if he/ she is in the higher IT slabs,” says Melvin Joseph, founder, Finvin Financial Planners.
“In such a scenario, we suggest liquid and ultra short-term (UST) funds for tax deferral advantage and diversification,” says Abhinav Gulechha, founder, Soham Financial Planners.
If an investor chooses dividend payout option in mutual funds, the dividend distribution tax (DDT) is taken out by the AMCs before paying out to the investor
Equity Mutual Funds: The levy of increased service tax – from 12.36% to 14% – will increase the cost of service for the investors. Experts, meanwhile, share their opinions for short-term and long-term investment plans. “We suggest a mix of debt and equity mutual funds (EMFs) to build a long-term investment portfolio as per investor’s risk appetite. For short-term goals, we suggest investor to stick to liquid/ ultra short-term plans only. We encourage investors to invest through the direct mode to benefit from reduced expense structure,” says Gulechha.
According to Rohit Shah, founder and CEO at GettingYouRich.com, tax-saving Mutual Funds or Equity Linked Saving Scheme (ELSS) investments are eligible for Section 80C benefit. “Investment is under a lock-in period of three years and returns are tax-free.”
Consumers should prefer no-frills policies with clear terms and conditions and no or little cappings. Top-up health insurance covers can be looked at to increase the coverage which comes at a much lesser cost
Financial consultant Manish Verma, says: “As per current tax rules, whatever profit we get for equity funds, if it is booked within one year it is treated as short-term capital gain and 15% tax is applicable on the same. If it is booked after one year, it is treated as long-term capital gain and no tax is applicable. For debt funds, any gain is treated as short-term capital gain till the gain is booked within three years of investment. Such gain is added to the income. Any gain arising after three years is treated as long-term capital gain. Tax on it is subject to indexation – 10% tax on gain if taken without indexation, 20% tax on the gain if taken with indexation.”
If an investor chooses dividend payout option in mutual funds, the dividend distribution tax (DDT) is taken out by the AMCs (asset managment companies) before paying out to the investor. DDT is zero in case of equities dividend or equity mutual funds’ dividends. It is nearly 28.84% for dividends distributed for debt mutual funds. It includes a surcharge of 10% which has now been increased to 12%. This will marginally impact payout at the hands of the investor and now the investor will receive a slightly lesser amount.
National Pension System (NPS) and Employee’s Provident Fund (EPF) schemes: It is well-known that the withdrawals from provident fund (PF) are not taxable as the same are exempt from tax. However, there is a rider of at least five year of continuous service to claim exemption from tax. If any employee makes pre-mature withdrawal before completing five years of service then such withdrawals are taxable. Therefore, any employee changing job before five years of service should prefer to transfer his provident fund balance to new provident fund account with new employer to save tax on pre-mature withdrawals. “In current budget, provisions have been incorporated to deduct income tax (TDS) on such pre-mature withdrawals from provident funds to capture non-disclosure of such withdrawals by individuals while filing their income tax returns,” says Taxation expert Vipin Garg.
At present, one can save up to Rs 1.5 lakh under Section 80C, which also includes Rs 1 lakh under Section 80CCC and 80CCD (pension products). Budget 2015 has increased the limit of savings under pension schemes and made it at par with Section 80C savings. Besides this, Section 80CCD(1B) was also announced where one can save extra Rs 50,000 in NPS and claim tax deduction. This Rs 50,000 would be over and above Rs 1.5 lakh.
Manikaran Singal, promoter, Good Moneying Financial Solutions, says: “Being a long-term product with equity exposure, it will definitely lead to accumulate much more than any other traditional savings like EPF or PPF. Assuming annual growth of 10% per annum Rs 50,000 annually for the next 20 years will result in Rs 31.50 lakh. But since the pension amount will be taxable, so one should have an adequate balance in taxable and tax-free products.”
What remains better option, NPS or EFP? Singal says: “Definitely, National Pension System (NPS) is a better option because of the equity exposure it will provide which is very necessary for growth in the long term. However, the main drawback in NPS is that the maturity and annual/monthly pension would be taxable whereas EPF would be tax-free. So, selection will depend on your other investments that the person is doing at personal level. If most of the savings at personal level are made in tax-free instruments like PPF, Equity Mutual funds, ULIPs, among others then investing in NPS might not be that harmful from taxation angle. From tax planning perspective, it is better to do proper retirement planning calculation, and then decide.”
The main drawback in NPS is that the maturity and annual/monthly pension would be taxable whereas EPF would be tax-free
As a step towards financial planning, Melvin Joseph, founder, Finvin Financial Planners First, says that one must calculate the EPF deduction from the salary. “Then check how much premium you are paying towards existing life insurance policies. Further, find out the principal repayment on your home loan. After that calculate the school fee payable in the year for your kids . All these are eligible for Section 80C. If the total does not calculate upt to Rs 1.5 lakh, you can opt for PPF, NPS, tax-saver bank deposits, among others on the debt side or ELSS mutual funds in the equity side.”
However, Gulechha observes that EPF still is a better option. “The maturity proceeds are tax exempt and there are no restrictions of choosing a certain portion of proceeds as annuity as in case of NPS. As regards the equity allocation is concerned, investor should himself invest in good diversified equity mutual funds through the direct route and that is a better option as compared to the NPS. We believe that as a scheme, NPS has to be given time to evolve and its taxability should be brought in line with other long term debt products like PPF and EPF.”
In a similar vein, Jitendra P. S. Solanki, investment advisor, YourPocket Money.com, says: “EPF will still attract more due to its EEE(exempt, exempt and exempt) status. Although EPF has higher liquidity which may not be ideal for retirement planning as experienced NPS major disadvantage is taxability of the maturity amount which gives a double blow considering the pension further received is also taxable. Contrary to the tax-free status of compounding returns will still attract investors more.”
Insurance policies: The premium will go up with increase of service tax . The tax benefit under Section 80C has been already enhanced to Rs 1.5 lakh which has been extended to even pension policies falling under Section 80CCC. Says Verma: “There are broadly three types of insurance policies – Term policy, endowment plans, Unit Linked Plans. There has been no change in tax treatment on the amounts received at the end of the insurance plan. It is tax-free at the hands of the investor. However, pension plans that may belong to endowment or ULIP category have a little twist in the tale. On a part of amount can be taken as a lump sum when the pension plan gets over. That amount is tax-free at the hands of the investor. The pension that is received at regular intervals is taxed at the hands of the investor depending on the slab rate he belongs to.”
Health insurance premiums: Health insurance premium comes under Section 80D of the Income Tax Act. Till this financial year, the deduction is available for up to Rs 15,000 premium for self and family, Rs 20,000 premium for senior citizens. Thus, if someone is paying premium for parents policy who are senior citizens, then one can claim benefit of up to Rs 35,000 within the specific limits.
Joseph says: “This will encourage many families to opt for a higher health cover and save tax. But for younger families, it may not help because they will get a decent cover within Rs 15,000 per year. For senior citizens, the limit is Rs 30,000. For very senior citizens who are not insurable, can claim Rs 30,000 deduction towards medical expenses.”
However, Gulechha point out that one should not consider health insurance as a mechanism to save tax and avoid running around for exhausting this new limit. “We advise clients on the basis of a proper needs analysis, family situation, lifestyle and then come up with how much health insurance is okay.”
Tax-free limit on travel allowance: Tax-free limit on travel allowance has been revised from Rs 800 per month to Rs 1,600 per month. Now, annually Rs 19,200 will be tax-free as transport allowance. This will save tax of Rs 1,920, Rs 3,840, Rs 5,760 at different tax slabs.
Solanki says: “The travelling allowance is a standard deduction from your salary after which the taxability of income is derived. Since it has been enhanced to Rs 1,600 per month, the employer should rework the salary structure to accommodate this benefit since your taxable income will reduce.”
Sukanya Samriddhi Account Scheme: The government has notified a special small savings instrument for the welfare of the girl child, namely Sukanya Samriddhi Account Scheme. The account can be opened for a girl child subject to maximum of two girl children. The amount deposited will be eligible for deduction from the income of the parent subject to a maximum of Rs 1.5 lakh. The interest income will be exempt from income tax. Likewise, any withdrawals from the account as per Scheme will also be exempt from income tax. This is a quite good scheme to save for the future education/marriage of a girl child.
